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Business software companies mull IPOs

In a sign that companies delivering business software over the Web are on the comeback trail, two leading names in the fledgling market are considering making IPOs next year.

In a sign that companies delivering business software over the Web are on the comeback trail, two leading names in the fledgling market are considering making initial public offerings next year.

One of them is Salesforce.com, which is frequently mentioned along with Google as one of the companies likely to rekindle the high-tech IPO scene. The company, based in San Francisco, has made a name for itself by trash-talking software rivals, particularly Siebel Systems. Both companies make business software designed to streamline the way companies sell and market their products. Salesforce claims that its software, available via the Web for a monthly fee, is cheaper and easier to use than Siebel's.

The chief executive of Salesforce, Marc Benioff, has said that although his company is ripe for an IPO, he's not ready to rush into one just yet. But a recent article in Fortune magazine said industry watchers expect the company to go public within a year. Benioff, who was not immediately available to comment, will likely offer more thoughts on the subject this week at a venture capital conference where he's scheduled to appear alongside the presidents of the New York Stock Exchange and the Nasdaq Stock Market. The topic of their panel discussion: Lemonade or Lemon: Is it Bittersweet to be a Public Company?

Salesforce competitor NetSuite (formerly NetLedger) is also eyeing its prospects for going public. "Certainly, by end of next year we could go public if we wanted to," said NetSuite Chief Executive Zach Nelson.


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The company, which is majority owned by Oracle Chief Executive Larry Ellison, is smaller than Salesforce in terms of revenue and has yet to turn a profit, but the companies appear to be on a similar growth curve. Salesforce expects to book $100 million in revenue this year, two times as much as last year's revenue. NetSuite expects revenue in the neighborhood of $20 million, and says that sales have quadrupled in the past year. It plans to expand into Europe and Asia, opening an office in London soon and inking a new distribution deal in Australia.

But most important to prospective investors, Salesforce says it has pulled in a profit during past two quarters. Nelson says NetSuite will break out of the red in the first quarter of next year.

Profitability is almost an IPO prerequisite these days, with investors still skittish about the flaky dot-coms that burned them a few years ago, experts say. "Investors have gone into such an extremely protective mode," said David Menlow, president of the research firm IPO Financial Network. "Ordinarily, profitable IPO would not be words used in the same sentence, but the bulk of deals coming to the marketplace are profitable, and investors aren't standing for anything else."

Menlow's advice to start-ups pondering IPOs is to wait another six to 12 months for investors to come farther out of their shells.

Yet the technology IPO market appears to be creeping back from its hiatus. In the three months of July through September, 22 companies went public, nine of which were start-ups financed by venture capital firms, according to a report released last week by the National Venture Capital Association and Thomson Venture Economics. By contrast, just eight venture-backed firms completed IPOs in the 12 months prior to July, the report said.

Among the newly minted public companies are Web retailer Red Envelope; NetGear, a maker of computer network equipment; and iPass, a network services company. In addition, 35 venture-backed companies are now in the IPO registration process with the Securities and Exchange Commission, making for a sizable IPO pipeline, according to the report.

A successful IPO would be a coup for companies such as Salesforce and NetSuite that dodged the dot-com death grip that claimed other start-ups in the same field. It could also raise the profile of those companies that offer an alternative to the traditional software licensing model and its associated, high up-front fees and big installation projects that often involve expensive consultants. Others in the market include RightNow Technologies and Upshot.

"What we and Salesforce show is that the ASP (application service provider) model is becoming enormously successful right now," Nelson said. "Companies are starting to realize the cost of maintaining (information technology) is a drag on their business and it's all pointing this way."